Outsourcing: China vs. India

Affected by the global economic crisis, China's exports dropped rapidly in the fourth quarter of 2008. In December, China's export growth was -2.8%, bringing the growth rate for 2008 to 17.2%, which is 2.1% lower than the growth in the first 11 months.

However, China's software industry still experienced fast growth in 2008. This year, China's software exports reached US$14.2 billion, up 39% year on year. Service outsourcing grew at an even faster speed of 54.3% to US$1.6 billion by the end of 2008. The growth in the whole year was 6.2% higher than the growth in the first 11 months.

The development of outsourcing has relied on support from both central and local authorities of China. China has been implementing industrial upgrades for a long time. Many Chinese cities and industrial parks consider outsourcing an effective way to achieve industrial upgrading.

During the current global recession, due to the downtown in the manufacturing and export sector, China has selected outsourcing as a new arena for economic growth. In February, 20 major cities, including Beijing, Shanghai, Tianjin, Chongqing, Shenzhen, and Chengdu, were chosen to become demonstration cities for service outsourcing. In these cities, the government will establish preferential policies such as tax cuts to encourage the development of outsourcing.

China is now eager to promote outsourcing, but the question is, can China's outsourcing be competitive with that of India?

Despite the boom in China's service outsourcing, it will be difficult for China to catch up with India, the giant in the international outsourcing industry. India has enjoyed both large market volume and fast growth, achieving an average annual growth of 37% over the past four years. In 2008, India captured nearly 37% of the global outsourcing market, while China took less than 10%.

India's outsourcing industry seemed invincible until one event in 2008 changed the situation. The Mumbai attacks, which reportedly caused 172 deaths, highlighted the potential risks of travel to India. It raised questions regarding the safety and stability of the Indian business environment, which is one of the major factors in the selection of an outsourcing partner.

However, the largest threat to India's outsourcing is not terrorism, but cost. The ratio of wages in India and the U.S. used to be 1:6, but recently it has been closer to 1:3, and can even reach 1:1.5. Indian labor is becoming a less efficient solution for the outsourcing businesses. When the global finnacial crisis came, more clients began to review their spending and cut costs, halting revenue streams and causing upheavals in India's outsourcing industry.

While India’s outsourcing entered difficult times, China saw opportunities, because India's limitations are China’s strengths. China has abundant IT human resources available at low cost. The ratio of wages in China and the U.S. is about 1:7 now, a ratio much more advantageous than that for India. China also provides a safe and stable environment to overseas investors: no terror attacks have ever taken place in Chinese cities.

But China also has its limitations. First, although China has a lot of IT talent, few IT workers are good at foreign languages, and thus few can communicate easily with overseas customers. This is the largest competitive difference between China and India. China also has few inter-disciplinary talents who are not only skilled in technical issues, but also in business process, management and interpersonal communication.

Second, China has poor intellectual property protection. Although the Chinese have been warned against intellectual property violations several times, piracy still flourishes throughout the country. Moreover, many Chinese companies are not even aware of whether their actions constitute piracy or are bringing high risk of intellectual property leakage to their clients. Since intellectual property protection is considered a crucial factor in selecting an outsourcing partner, poor protection is the second largest limitation of China's outsourcing industry.

Third, the development of China's outsourcing industry lags ten years behind that of India. Chinese outsourcing companies are usually small. India has many outsourcing companies with annual revenue of over US$1 billion, but in China there are few outsourcing companies with annual revenue exceeding US$0.1 billion. Also, Chinese companies are engaged mainly in coding, whereas Indian rivals can provide comprehensive solutions to clients.

Therefore, performance figures such as outsourcing exports and growth are not the only differences between the outsourcing industries of China and India. Like manufacturers, China's outsourcing companies always emphasize low cost to attract clients. Although the global financial crisis highlights such advantages, cost is still not the most important factor for potential clients. Clients pay more attention to service capabilities, including intellectual property protection, language skill, and ability to provide comprehensive solutions. The global economic crisis and the Mumbai attack have temporarily caused some shifting of outsourcing business from India to China, but this trend will not last. Should China return its slice of the outsourcing pie to India when the end comes?